Permalink & Text Widget problems

1. When I change my permalinks from the default setting to one of the other options, my menu bar links to pages don't seem to work anymore. I get a message that the page cannot be found. It doesn't matter which setting I select for the permalinks.

2. I have placed the following html into a text widget in the right column, after following jugglehead's instructions to someone else on the forum. (I've placed the images into the directory as he instructed):

No image shows up. If I place alternate text there as in: alt="Montford Festival" - the words show up as a link which works fine. Just can't seem to get the image to show up. I've tried this with three separate images and none of them are showing. I've checked the directory on my server site, and the images I uploaded are exactly where they are supposed to be.